Special Economic Zones to attract foreign investors

Investors can ask authorities in Special Economic Zones to build facilities for them. Pictured: a business center in the St.Petersburg Special Economic Zone. Source: PhotoXPress

A Russian or foreign company, if it qualifies as a "resident" of a special economic zone, can save up to 30 percent of the cost of setting up a production unit through tax relief, customs benefits and immediate access to utilities.

As
if tax relief isn't alluring enough, the government's Special Economic
Zones now offers new services to net international firms.

Investors
no longer have to build their own facilities, but can ask Special Economic
Zones to do it for them, said chief executive Oleg Kostin in an
interview. The investor then rents the space.

Special
Economic Zones, which is the state company managing 24 dedicated locations
around the country, offers the opportunity to remove
the risk for investors of wasting construction costs if
the business doesn't take off — and spare them the hassle
of operating the building, he said.

"Sometimes,
they say it is a standard practice for them in any country
around the world," Kostin said about the renting option.
"For us, it's a chance to attract a large company."

Nokia
Siemens Networks said the rental proposal was essential for its
Russian joint venture in selecting the Tomsk zone to set up
a plant. Nokia Siemens Networks has a policy to avoid ownership
of real estate, chief executive for Russia, Kristina Tikhonova, said
through an aide.

The joint
venture, where the foreign company is majority owner, will produce
telecoms equipment at the plant that opened last week, just months after
the partners signed a tentative agreement in March to work
together.

The rental
revenues could pay for construction within eight years, Kostin said. Built
to standard design, the facilities could still be good for other
potential companies if the original producer pulls out of the zone.

Special
Economic Zones offers the ready-made rental option in four zones
where investors expressed interest: Tomsk, St. Petersburg, Alabuga
in Tatarstan and Zelenograd, a town outside Moscow that's
formally a district of the city.

A Russian
or foreign company, if it qualifies as a "resident" of a
special economic zone, can save up to 30 percent of the cost
of setting up a production unit through tax relief, customs benefits
and immediate access to utilities.

A council
run by the Economic Development Ministry, made up of its officials
and top executives from state-controlled banks and state
corporations like Russian Technologies, holds the ultimate power
to admit companies as residents of Russia's 24 zones if they meet
conditions that include the application of advanced technology
and potential to make products that replace imports or are suitable
for export.

Since
the inception of special economic zones in 2006, the effort
has drawn 272 businesses whose declared total investment stands at 308
billion rubles, or $9.9 billion.

They
are mostly Russian companies, but include such multinational corporations as Japanese tire
maker Yokohama Rubber, French industrial gases producer Air Liquide, Danish
construction materials manufacturer Rockwool, Swiss drugs company Novartis
and the U.S. flexible display developer Plastic Logic.

Foreigners
did inspire the new rent-a-plant proposal, but they generally don't get
special treatment at Special Economic Zones, said Kostin,
a 36-year-old former investment official at the Economic Development
Ministry who assumed his new position in March. Russian residents prevail
at the moment because they are better aware of the opportunity,
Kostin said. In order to reach out to overseas companies,
Special Economic Zones is promoting itself through large international
consulting firms and subscribed to a Financial Times service that
alerts users to corporate announcements about Russia.

"We
hope that we will have many foreign companies, too," he said.

Investors
won't find greater benefits anywhere else in Russia, Kostin said.
Governors may offer some similar tax incentives, but unlike Special Economic
Zones, they have no power to cancel customs duties and lack
the federal financial prowess to build electricity and heating
lines and create other services on sites, he said.
The government has spent more than 45 billion rubles to develop
the zones so far.

For the
four zones that specialize in research and development,
the government offers discounted payroll taxes. Every up-and-running special
economic zone also houses offices of various government agencies, should investors need
to contact them quickly.

"We
believe the package of services that we can offer is unique,"
Kostin said.

In fact,
the tax breaks, which last for at least five years, all come
at the expense of regional and local budgets that normally
collect the taxes on land, vehicles and corporate property.

The profit
tax, which is normally 20 percent, is reduced to 15.5 percent
for zone residents — but the cut comes at the expense
of the regional budget. The federal government will still get its
full 2 percent portion.

Governors
can also slash the regional slice of the profit tax by 4 percent
and reduce the corporate property tax, said Pavel Vasin,
a Moscow-based associate at German law firm CMS. But they provide
such incentives only if they view the investment as significant —
a notion that varies from region to region, he said.

In the
Moscow region, home to two research and development special economic
zones, the authorities grant profit tax relief if an investor invests
upward of 500 million rubles. A lower property tax comes
into play if property value rises above 300 million rubles.

Industrial
zones require investors to cough up at least 3 million euros (125
million rubles), while port zones look for 10 million euros or more.

But
potential investors may opt to set up business elsewhere in Russia
anyway if the consideration of being closer to their customers
or suppliers outweighs the benefits of the zones, Vasin said.

"There
are geographical preferences," he said. "An investor … may base his decision
on logistical rather than fiscal advantages."

Air
Liquide had nothing but accolades for the Alabuga industrial zone where
the company launched the first phase of its 35 million euro
plant last year.

"We
are very happy," said Dmitry Kuznetsov, director for strategic
projects at the company's Russian office. "Everything they have
on paper materializes in life.

"It's
not one of those initiatives that occasionally declare one thing
and result in something else."

Air
Liquide — !! which sells its gaseous oxygen a German-Russian fiberglass
producer that is a neighbor in the Alabuga zone !! — especially
valued the opportunity to connect to the electricity supply free
of charge, Kuznetsov said.

Outside
the zones, the price tag for this hook-up could be hundreds
of millions of rubles ($3 million to $16 million)
in industrial regions, where Air Liquide typically seeks to locate
its energy-intensive plants to be close to customers, he said.

Exemptions
from the customs duties and the value-added tax on imports
reduced the costs of components imported to build
the plant, he said.

Next
year may see a boost in the development of special economic
zones in ports and airports because of pending legislative
changes, Kostin said. Among other things, the changes, in effect
from Jan. 1, will allow setting up production in these zones, whereas
now businesses registered there can only provide services.

Special
Economic Zones Cater to Tourists, Too

Thirteen
of the country's 24 special economic zones are vehicles to develop
tourism. They are mostly in southern and eastern Russia.

One
of their most expensive projects is a brainchild of Pyotr Shura,
whose company Rusresorts wants to build a $1 billion resort near Lake
Baikal, as part of the far eastern cluster of tourism zones.

Upmarket
resorts in clean and picturesque areas in the east could draw
tourists from China and invite stopovers by Russians traveling
from the west to warm-weather destinations like Vietnam
and Thailand, said Oleg Kostin, chief of Special Economic Zones.

The other
cluster of tourist special economic zones seeks to turn
the restive Russian Caucasus into a magnet for vacationers.
Special Economic Zones partnered two other state-controlled institutions, lenders
Sberbank and VEB, to create a company, called North Caucasus
Resorts, that aims to develop and operate six areas in the Caucasus.